Posted by: Kenji Hall on January 22, 2009

As demand for consumer electronics craters worldwide, Sony is looking to pare back its TV production in Japan, possibly stopping work at one of two domestic factories where it assembles flat-panel sets, a company spokesman said on Thursday. More details are expected to be announced by Chairman and CEO Howard Stringer.

The Nikkei business daily reported in its morning edition that Sony would announce the move along with plans to eliminate 2,000 full-time jobs—or about 3% of its domestic staff. Until Stringer speaks, it’s hard to know whether the restructuring of Sony’s TV business is part of broader reforms the company unveiled in December.

On Thursday afternoon, the company issued its second profit warning in three months, signaling that its October forecast for profits this year was too optimistic. It now expects an annual operating loss of $2.9 billion, instead of $2.2 billion in profits. That would be the company’s first operating loss in 14 years. Sales are predicted to fall 13% to $86 billion rather than rising 1.4% to $10 billion.

Analysts have questioned whether the company is prepared to do what it takes to limit the damage from the current recession. And news reports in recent weeks suggest Stringer is encountering resistance from managers to take more drastic measures. Sony’s TV business lost roughly $2.3 billion in the past four years, hampering Stringer’s efforts to turn around the company’s struggling electronics business. Goldman Sachs expects the TV unit to lose another $1.1 billion this fiscal year, which ends in March. In Japan, Sony has two plants churning out liquid-crystal-display TVs, both of them located in Aichi prefecture. The Nikkei said the furloughed plant would likely be used for distribution.

Given the scale of the sales drop and the possibility of operating losses exceeding ¥100 billion if no action is taken, we see massive cuts in fixed costs as unavoidable. Moreover, those cuts will have to come on the yen side, necessitating genuinely painful restructuring measures extending to the head office, factories and research centers. The key will be whether management takes immediate and sufficient action, not only staff cuts but simultaneously laying the groundwork for the next cycle. With no hope of an imminent improvement in earnings, management’s response could determine whether the shares will bottom out soon or remain stagnant for the long term.

Last month, Sony said it would close five or six plants, get rid of 16,000 salaried and contract workers, and slash investment. The measures were expected to help Sony save $1.1 billion a year. That would help counter the huge hit the company has taken from falling gadget sales and the yen’s surge against other currencies in recent months. (A strong yen is generally bad for Japanese exporters like Sony, which makes 80% of its revenues overseas, because it lowers the value of earnings made in markets outside of Japan when those earnings are converted to yen. One sign that there might not be an immediate reversal: Treasury Secretary-designate Timothy Geithner warned Japan not to intervene in currency markets to weaken the yen.)

What’s Sony to do?

Reduce headcount for starters, says analysts. At the end of March 2005, Sony had 151,400 employees, according to the company’s annual report. It had been trimming its workforce, even as it was adding new production facilities in China and other countries. But the latest tally shows a sharp increase: 186,000. That's partly due to the expansion of electronics plants in Asia and Eastern Europe and Sony’s buyout of Bertelsmann, its partner in the Sony BMG music venture.

Another suggestion that’s been tossed around by pundits: Sony should stop trying to manufacture so many things and focus on design, the way Apple and Nintendo do. Sony has 57 manufacturing sites (not plants—sometimes it makes different products at the same production complex), 28 of which are located in Japan. Those facilities make everything from tiny image-sensor chips for cameras to giant-screen TVs.

Sony already relies on contract manufacturers to make its low-end digital cameras and videogame consoles. But there’s plenty more that Sony could do. “For high-end products, the proprietary technology might give you the edge in cameras,” says Macquarie Securities’ David Gibson. “You might want to keep the premium product but you don’t need to manufacture the commodity products yourself.”

And there's no shortage of companies willing to take on the work. "Senior executives at contract manufacturers [in the U.S. and Asia] are chomping at the bit to get some of Japanese consumer electronics manufacturers’ business,” says iSuppli analysts Adam Pick, who specializes in outsourcing.

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.